Novavax: A risky but potentially lucrative vaccine play

If it weren't for the swine flu, vaccine-maker Novavax (NVAX) may have remained in the somewhat obscure realm of small clinical-stage biotechs. But the H1N1 pandemic and the vaccine shortage that ensued propelled this $330 million market capitalization company to broader awareness after it proposed a novel way of manufacturing the vaccine that gets around the age-old method of growing the virus in chicken eggs.

Novavax says its proprietary virus-like particle technology can slash weeks off the time needed to produce vaccine, and it's moving closer to commercializing its flu vaccines.

Positive results from several clinical trials that showed better response than current vaccine, as well as support from the National Institutes of Health and an agreement in Spain regarding the technology, rocketed the share price up some 250% from June through to September, from just under $2 to about $6.5. That cooled many investors because of the possible high valuation. However, shares have since dropped about 43% and closed at $3.21 on Tuesday.

On Wednesday, shares jumped 6.85% to $3.43 after Novavax announced its H1N1 flu vaccine showed positive results in the first phase of a two-part, mid-stage study, in Mexico. The vaccine was well tolerated at all three dosage levels tested and exhibited no systemic side effects.

Beyond the Flu

The question is whether Novavax can soon successfully commercialize its manufacturing methodology, especially in time to take advantage of the (fading) pandemic scare. And whether it can do so without getting too strapped for cash despite its Nov. 20 offering. The company continues to lose money, posting a third-quarter net loss of $7.5 million, or 8 cents per share.

Novavax is also trying to apply its methodology to vaccines other than those aimed at influenza varities (seasonal, H1N1 and H5N1 or "bird flu"). The Rockville, Md., company is also working on HIV, respiratory syncytial virus (RSV) and varicella zoster virus (VZV) vaccines. HIV causes AIDS, RSV is the primary cause of serious respiratory disease in infants and young children worldwide, and VZV is responsible for over 1 million cases of herpes zoster (shingles) in the U.S. each year. Each of these, if successful, could have considerable markets, but they're in early stages, making an investment that much riskier.

Since Novavax isn't profitable, many of the measures are inapplicable. But the company managed to increase cash, cash equivalents and marketable securities to $34.4 million by the end of the last quarter from $33.9 million at December 31, 2008. It also managed to reduce debt.

Got the Stomach for a Wild Ride?

Analysts' average price target is $4.50 -- about 30% higher than the current price. The average recommendation according to Thomson Reuters is outperform, but according to First Call it's hold. Regardless, this is a small company, making investment that much riskier. In addition, it's not profitable and everything hinges on its ability to commercialize its vaccine methodology. However, for those who can stomach a roller-coaster ride -- not unusual with small-cap companies -- it might be worthwhile.

As a Piper Jaffray analyst, who initiated NVAX at overweight, says: "Seasonal flu vaccines represent a $6 billion and growing annual market.... Perhaps even more topical, Novavax has developed pandemic flu vaccines against H5N1 and H1N1 strains that could generate sales in 2010," long before the cash from the recent offering runs out.

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